[Federal Register: October 22, 2010 (Volume 75, Number 204)]
[Proposed Rules]
[Page 65263-65278]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22oc10-27]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Part 2510
RIN 1210-AB32
Definition of the Term ``Fiduciary''
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: This document contains a proposed rule under the Employee
Retirement Income Security Act (ERISA) that, upon adoption, would
protect beneficiaries of pension plans and individual retirement
accounts by more broadly defining the circumstances under which a
person is considered to be a ``fiduciary'' by reason of giving
investment advice to an employee benefit plan or a plan's participants.
The proposal amends a thirty-five year old rule that may
inappropriately limit the types of investment advice relationships that
give rise to fiduciary duties on the
[[Page 65264]]
part of the investment advisor. The proposed rule takes account of
significant changes in both the financial industry and the expectations
of plan officials and participants who receive investment advice; it is
designed to protect participants from conflicts of interest and self-
dealing by giving a broader and clearer understanding of when persons
providing such advice are subject to ERISA's fiduciary standards. For
example, the proposed rule would define certain advisers as fiduciaries
even if they do not provide advice on a ``regular basis.'' Upon
adoption, the proposed rule would affect sponsors, fiduciaries,
participants, and beneficiaries of pension plans and individual
retirement accounts, as well as providers of investment and investment
advice related services to such plans and accounts.
DATES: Written comments on the proposed regulations should be submitted
to the Department of Labor on or before January 20, 2011.
FOR FURTHER INFORMATION CONTACT: Fred Wong, Office of Regulations and
Interpretations, Employee Benefits Security Administration (EBSA),
(202) 693-8500. This is not a toll-free number.
ADDRESSES: To facilitate the receipt and processing of comment letters,
the EBSA encourages interested persons to submit their comments
electronically by e-mail to e-ORI@dol.gov (enter into subject line:
Definition of Fiduciary Proposed Rule) or by using the Federal
eRulemaking portal at http://www.regulations.gov. Persons submitting
comments electronically are encouraged not to submit paper copies.
Persons interested in submitting paper copies should send or deliver
their comments to the Office of Regulations and Interpretations,
Employee Benefits Security Administration, Attn: Definition of
Fiduciary Proposed Rule, Room N-5655, U.S. Department of Labor, 200
Constitution Avenue, NW., Washington, DC 20210. All comments will be
available to the public, without charge, online at http://
www.regulations.gov and http://www.dol.gov/ebsa and at the Public
Disclosure Room, N-1513, Employee Benefits Security Administration,
U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210.
SUPPLEMENTARY INFORMATION:
A. Background
The Employee Retirement Income Security Act of 1974 (ERISA) is a
comprehensive statute designed to promote the interests of participants
in employee benefit plans and their beneficiaries by establishing
standards of conduct, responsibility, and obligation for fiduciaries of
those plans. ERISA imposes a number of stringent duties on those who
act as plan fiduciaries, including a duty of undivided loyalty, a duty
to act for the exclusive purposes of providing plan benefits and
defraying reasonable expenses of administering the plan, and a
stringent duty of care grounded in the prudent man standard from trust
law.\1\ Congress supplemented these general duties by categorically
barring, subject to exemption, certain ``prohibited'' transactions.\2\
Fiduciaries are personally liable for losses sustained by a plan that
result from a violation of these rules.\3\
---------------------------------------------------------------------------
\1\ ERISA section 404(a).
\2\ ERISA section 406.
\3\ ERISA section 409.
---------------------------------------------------------------------------
Section 3(21)(A) of ERISA provides in relevant part that a person
is a fiduciary with respect to a plan to the extent (i) it exercises
any discretionary authority or discretionary control with respect to
management of such plan or exercises any authority or control with
respect to management or disposition of its assets, (ii) it renders
investment advice for a fee or other compensation, direct or indirect,
with respect to any moneys or other property of such plan, or has any
authority or responsibility to do so, or (iii) it has any discretionary
authority or discretionary responsibility in the administration of such
plan.\4\ On its face, section 3(21)(A)(ii) sets out a simple two-part
test for determining fiduciary status: A person renders investment
advice with respect to any moneys or other property of a plan, or has
any authority or responsibility to do so; and the person receives a fee
or other compensation, direct or indirect, for doing so.
---------------------------------------------------------------------------
\4\ Section 4975(e)(3) of the Internal Revenue Code of 1986, as
amended (Code) provides a similar definition of the term fiduciary
for purposes of Code section 4975.
---------------------------------------------------------------------------
In 1975, shortly after ERISA was enacted, the Department issued a
regulation, at 29 CFR 2510.3-21(c), that defines the circumstances
under which a person renders ``investment advice'' to an employee
benefit plan within the meaning of section 3(21)(A)(ii) of ERISA.\5\ A
person who renders ``investment advice'' under the regulation, and
receives a fee or other compensation, direct or indirect, for doing so,
is a fiduciary under section 3(21)(A)(ii). The current regulation
provides in relevant part as follows:
---------------------------------------------------------------------------
\5\ 40 FR 50842 (Oct. 31, 1975). The Department of Treasury
issued a virtually identical regulation, at 26 CFR 54.4975-9(c),
that interprets Code section 4975(e)(3). 40 FR 50840 (Oct. 31,
1975). Under section 102 of Reorganization Plan No. 4 of 1978, 5
U.S.C. App. 1 (1996), the authority of the Secretary of the Treasury
to interpret section 4975 of the Code has been transferred, with
certain exceptions not here relevant, to the Secretary of Labor.
References in this document to sections of ERISA should be read to
refer also to the corresponding sections of the Code.
(c) Investment advice. (1) A person shall be deemed to be
rendering ``investment advice'' to an employee benefit plan, within
the meaning of section 3(21)(A)(ii) of the Employee Retirement
Income Security Act of 1974 (the Act) and this paragraph, only if:
(i) Such person renders advice to the plan as to the value of
securities or other property, or makes recommendation as to the
advisability of investing in, purchasing, or selling securities or
other property; and
(ii) Such person either directly or indirectly (e.g., through or
together with any affiliate)--
(A) Has discretionary authority or control, whether or not
pursuant to agreement, arrangement or understanding, with respect to
purchasing or selling securities or other property for the plan; or
(B) Renders any advice described in paragraph (c)(1)(i) of this
section on a regular basis to the plan pursuant to a mutual
agreement, arrangement or understanding, written or otherwise,
between such person and the plan or a fiduciary with respect to the
plan, that such services will serve as a primary basis for
investment decisions with respect to plan assets, and that such
person will render individualized investment advice to the plan
based on the particular needs of the plan regarding such matters as,
among other things, investment policies or strategy, overall
portfolio composition, or diversification of plan investments.
The regulation significantly narrows the plain language of section
3(21)(A)(ii), creating a 5-part test that must be satisfied in order
for a person to be treated as a fiduciary by reason of rendering
investment advice. For advice to constitute ``investment advice,'' an
adviser who does not have discretionary authority or control with
respect to the purchase or sale of securities or other property for the
plan must--
(1) Render advice as to the value of securities or other property,
or make recommendations as to the advisability of investing in,
purchasing or selling securities or other property
(2) On a regular basis
(3) Pursuant to a mutual agreement, arrangement or understanding,
with the plan or a plan fiduciary, that
(4) The advice will serve as a primary basis for investment
decisions with respect to plan assets, and that
(5) The advice will be individualized based on the particular needs
of the plan.
The Department further limited the term ``investment advice'' in a
1976 advisory opinion. Under the facts described therein, the
Department concluded that a valuation of closely-held employer
securities that an employee stock ownership plan (ESOP)
[[Page 65265]]
would rely on in purchasing the securities would not constitute
investment advice under the regulation.\6\
---------------------------------------------------------------------------
\6\ Advisory Opinion 76-65A (June 7, 1976) (AO 76-65A).
---------------------------------------------------------------------------
The current regulation has not been updated since its promulgation
in 1975. Since that time, however, the retirement plan community has
changed significantly, with a shift from defined benefit (DB) plans to
defined contribution (DC) plans. The financial marketplace also has
changed significantly, and the types and complexity of investment
products and services available to plans have increased. With the
resulting changes in plan investment practices, and relationships
between advisers and their plan clients, the Department believes there
is a need to re-examine the types of advisory relationships that should
give rise to fiduciary duties on the part of those providing advisory
services. In this regard, we note that recent Department enforcement
initiatives indicate there are a variety of circumstances, outside
those described in the current regulation, under which plan fiduciaries
seek out impartial assistance and expertise of persons such as
consultants, advisers and appraisers to advise them on investment-
related matters.\7\ These persons significantly influence the decisions
of plan fiduciaries, and have a considerable impact on plan
investments. However, if these advisers are not fiduciaries under
ERISA, they may operate with conflicts of interest that they need not
disclose to the plan fiduciaries who expect impartiality and often must
rely on their expertise, and have limited liability under ERISA for the
advice they provide. Recent testimony by the Government Accountability
Office noted an association between pension consultants with
undisclosed conflicts of interest and lower returns for their client
plans.\8\ The Department believes that amending the current regulation
to establish additional circumstances where investment advice providers
are subject to ERISA's fiduciary responsibilities would better protect
the interests of plans and their participants and beneficiaries. As a
consequence of the current regulation, the Department's investigations
of investment advisers must focus on establishing each of the elements
of the 5-part test rather than on the precise misconduct at issue in
particular cases. Even if an adviser advises a plan about its
investments for a fee, the plan relied upon the advice based upon
reasonable belief that it was impartial, and the advice was wholly
abusive, the Department must still prove each of the test's five
elements in order to assert a fiduciary breach. The Department does not
believe that this approach to fiduciary status is compelled by the
statutory language. Nor does the Department believe the current
framework represents the most effective means of distinguishing persons
who should be held accountable as fiduciaries from those who should
not. For these reasons, the Department believes it is appropriate to
update the ``investment advice'' definition to better ensure that
persons, in fact, providing investment advice to plan fiduciaries and/
or plan participants and beneficiaries are subject to ERISA's standards
of fiduciary conduct.
---------------------------------------------------------------------------
\7\ The Department's Employee Benefits Security Administration
(EBSA) maintains a national enforcement project designed to identify
and correct violations of ERISA in connection with Employee Stock
Ownership Plans. One of the most common violations found is the
incorrect valuation of employer securities. Another project, the
Consultant/Adviser project (CAP) focuses on ERISA violations that
may occur in connection with the receipt of improper, undisclosed
compensation by pension consultants and other investment advisers.
Information on the EBSA's national enforcement projects can be found
at http://www.dol.gov/ebsa/erisa_enforcement.html.
\8\ Conflicts of Interest Can Affect Defined Benefit and Defined
Contribution Plans, GAO 09-503T (Mar. 24, 2009).
---------------------------------------------------------------------------
B. Overview of Proposal
1. Proposed Amendment to Regulation Under ERISA Section 3(21)(A)(ii)
In general, the proposal amends paragraph (c) of Sec. 2510.3-21 by
striking the current paragraph (c)(1), redesignating the current
paragraph (c)(2) as paragraph (c)(5), and adding new paragraphs (c)(1)
through (c)(4). New paragraph (c)(1) sets out the general rule that a
person renders ``investment advice'' for a fee or other compensation,
direct or indirect, to an employee benefit plan, within the meaning of
section 3(21)(A)(ii) of ERISA and the regulation, if the person
provides advice or makes recommendations described in paragraph
(c)(1)(i), directly or indirectly meets any of the conditions described
in paragraph (c)(1)(ii), and receives a fee or other compensation,
direct or indirect, for providing such advice or recommendations. New
paragraph (c)(2) sets forth certain limitations in the application of
paragraph (c). New paragraph (c)(3) provides guidance with respect to
the meaning of the term ``fee or other compensation, direct or
indirect,'' as used in section 3(21)(A)(ii) of ERISA. New paragraph
(c)(4) clarifies the proposed amendment would apply for purposes of
Code section 4975.
a. Description of Advice
Under paragraph (c)(1)(i)(A) of the proposal, the types of advice
and recommendations that may result in fiduciary status under ERISA
section 3(21)(A)(ii) are: Advice, appraisals or fairness opinions
concerning the value of securities or other property; recommendations
as to the advisability of investing in, purchasing, holding, or selling
securities or other property; or advice or recommendations as to the
management of securities or other property.
This provision encompasses the same types of investment-related
advice and recommendations as covered by paragraph (c)(1)(i) of the
current regulation, except for the following modifications. First, the
proposal specifically includes the provision of appraisals and fairness
opinions. As discussed above, the Department concluded in AO 76-65A
that a valuation of closely held employer securities that would be
relied on in the purchase of the securities by an ESOP would not
constitute investment advice under the current regulation. However, a
common problem identified in the Department's recent ESOP national
enforcement project involves the incorrect valuation of employer
securities.\9\ Among these are cases where plan fiduciaries have
reasonably relied on faulty valuations prepared by professional
appraisers. The Department believes that application of the proposal to
appraisals and fairness opinions rendered in connection with plan
transactions may directly or indirectly address these issues, and align
the duties of persons who provide these opinions with those of
fiduciaries who rely on them. Accordingly, paragraph (c)(1)(i)(A)(1) of
the proposal specifically includes the provision of appraisals and
fairness opinions concerning the value of securities or other property.
This paragraph is intended to supersede the Department's conclusion in
AO 76-65A, but is not limited to employer securities. Therefore, if a
person is retained by a plan fiduciary to appraise real estate being
offered to the plan for purchase, then the provision of the appraisal
would fall within paragraph (c)(1)(i)(A)(1) of the proposal, and may
result in fiduciary status under ERISA section 3(21)(A)(ii). The
Department would expect a fiduciary appraiser's determination of value
to be unbiased, fair, and objective, and to be made in good faith and
based on a prudent investigation under the prevailing
[[Page 65266]]
circumstances then known to the appraiser.
---------------------------------------------------------------------------
\9\ See footnote 7.
---------------------------------------------------------------------------
Second, the proposal at paragraph (c)(1)(i)(A)(3) makes specific
reference to advice and recommendations as to the management of
securities or other property. This would include, for instance, advice
and recommendations as to the exercise of rights appurtenant to shares
of stock (e.g., voting proxies),\10\ and as to the selection of persons
to manage plan investments.
---------------------------------------------------------------------------
\10\ The fiduciary act of managing plan assets that are shares
of corporate stock include the management of voting rights
appurtenant to those shares of stock. 29 CFR 2509.08-2.
---------------------------------------------------------------------------
Finally, the proposal at paragraph (c)(1)(i)(B) makes clear that
fiduciary status under section 3(21)(A)(ii) may result from the
provision of advice or recommendations not only to a plan fiduciary,
but also to a plan participant or beneficiary. This reflects the
Department's long-standing interpretation of the current
regulation.\11\ The Department notes that it also has taken the
position that, as a general matter, a recommendation to a plan
participant to take an otherwise permissible plan distribution does not
constitute investment advice within the meaning of the current
regulation, even when that advice is combined with a recommendation as
to how the distribution should be invested.\12\ Concerns have been
expressed that, as a result of this position, plan participants may not
be adequately protected from advisers who provide distribution
recommendations that subordinate participants' interests to the
advisers' own interests. The Department, therefore, is requesting
comment on whether and to what extent the final regulation should
define the provision of investment advice to encompass recommendations
related to taking a plan distribution. The Department is specifically
interested in information on other laws that apply to the provision of
these types of recommendations, whether and how those laws safeguard
the interests of plan participants, and the costs and benefits
associated with extending the regulation to these types of
recommendations.
---------------------------------------------------------------------------
\11\ See 29 CFR 2509.96-1(c).
\12\ Advisory Opinion 2005-23A (Dec. 7, 2005).
---------------------------------------------------------------------------
b. Conditions
Paragraph (c)(1)(ii) of the proposal sets forth alternative
conditions, at paragraphs (c)(1)(ii)(A) through (D), at least one of
which must be met by a person rendering advice described in paragraph
(c)(1)(i) in order for the person to be considered rendering investment
advice under the proposal. The conditions may be met by the person
acting directly or indirectly, such as through or together with an
affiliate. These alternative conditions generally relate to the degree
of authority, control, responsibility or influence that is possessed,
directly or indirectly, by the person rendering the advice, and the
reasonable expectations of the persons receiving the advice. The
conditions at paragraphs (c)(1)(ii)(B) and (D) of the proposal are
based on paragraphs (c)(1)(ii)(A) and (B) of the current regulation
(which include elements of the 5-part test described above), but with
modifications to simplify their application and broaden their scope.
The conditions at paragraphs (c)(1)(ii)(A) and (C) are new, and are
intended to broaden the scope of the regulation based on readily-
ascertainable criteria.
Paragraph (c)(1)(ii)(A) of the proposal includes persons providing
advice or recommendations described in paragraph (c)(1)(i) that
represent or acknowledge that they are acting as a fiduciary within the
meaning of ERISA with respect to such advice or recommendations. The
Department believes that explicitly claiming ERISA fiduciary status,
orally or in writing, enhances the adviser's influence, and gives the
advice recipient a reasonable expectation that the advice will be
impartial and prudent. Therefore such a representation or
acknowledgment in connection with provision of the advice or
recommendations described in paragraph (c)(1)(i) is sufficient under
the proposal to result in fiduciary status under section 3(21)(A)(ii)
if provided for a fee or other compensation, direct or indirect.
Paragraph (c)(1)(ii)(B) of the proposal includes persons providing
the types of investment-related advice or recommendations described in
paragraph (c)(1)(i) that are fiduciaries with respect to the plan
within the meaning of section 3(21)(A)(i) or (iii) of ERISA. This
provision is based on the condition in paragraph (c)(1)(ii)(A) of the
current regulation, which is met if the person rendering advice
directly or indirectly has discretionary authority or control with
respect to purchasing or selling securities or other property for the
plan. However, the proposal broadens the scope of this condition by
referencing a person who is a fiduciary within the meaning of section
3(21)(A)(i) or (iii) of ERISA, which is not limited to persons with
authority or control relating to purchases or sales of investments for
a plan. Specifically, section 3(21)(A)(i) and (iii) describe any person
who exercises any discretionary authority or discretionary control with
respect to management of the plan, exercises any authority or control
with respect to management or disposition of its assets, or has any
discretionary authority or discretionary responsibility in the
administration of the plan.
Paragraph (c)(1)(ii)(C) includes persons providing advice or
recommendations described in paragraph (c)(1)(i) that are investment
advisers within the meaning of section 202(a)(11) of the Investment
Advisers Act of 1940 (Advisers Act), 15 U.S.C. 80b-2(a)(11). This
section generally defines an ``investment adviser'' as any person who,
for compensation, engages in the business of advising others as to the
value of securities or the advisability of investing in, purchasing, or
selling securities, or who promulgates analyses or reports concerning
securities. However, section 202(a)(11) specifically excludes the
following: (1) A bank, or any bank holding company as defined in the
Bank Holding Company Act of 1956, which is not an investment company,
except that the term ``investment adviser'' includes any bank or bank
holding company to the extent that such bank or bank holding company
serves or acts as an investment adviser to a registered investment
company, but if such services or actions are performed through a
separately identifiable department or division of a bank, the
department or division, and not the bank itself, is deemed to be the
investment adviser; (2) any lawyer, accountant, engineer, or teacher
whose performance of such services is solely incidental to the practice
of his or her profession; (3) any broker or dealer whose performance of
such services is solely incidental to the conduct of his business as a
broker or dealer and who receives no special compensation therefor; (4)
the publisher of any bona fide newspaper, news magazine or business or
financial publication of general and regular circulation; (5) any
person whose advice, analyses, or reports relate to no securities other
than securities which are direct obligations of or obligations
guaranteed as to principal or interest by the United States, or
securities issued or guaranteed by corporations in which the United
States has a direct or indirect interest which shall have been
designated by the Secretary of the Treasury, pursuant to section
3(a)(12) of the Securities Exchange Act of 1934, as exempted securities
for the purposes of that Act; (6) any nationally recognized statistical
rating organization, as that term is defined in section 3(a)(62) of the
Securities Exchange Act of 1934, unless such organization engages in
issuing recommendations as to purchasing,
[[Page 65267]]
selling, or holding securities or in managing assets, consisting in
whole or in part of securities, on behalf of others; or (7) such other
persons designated by the Securities and Exchange Commission (SEC) by
rules, regulations or orders.\13\ Courts have determined that these
investment advisers owe fiduciary duties to their clients under the
Advisers Act.\14\ In this regard, the SEC has stated: ``the Investment
Advisers Act imposes on investment advisers an affirmative duty to
their clients of utmost good faith, full and fair disclosure of all
material facts, and an obligation to employ reasonable care to avoid
misleading their clients.'' \15\ Thus, the Department proposes to
include these persons under the regulation.
---------------------------------------------------------------------------
\13\ See Advisers Act section 202(a)(11)(A)-(G), 15 U.S.C. 80b-
2(a)(11)(A)-(G).
\14\ SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180
(1963).
\15\ SEC Advisers Act Rel. No. 1393 (Nov. 29, 1993).
---------------------------------------------------------------------------
Paragraph (c)(1)(ii)(D) includes persons that provide advice or
make recommendations described in paragraph (c)(1)(i) pursuant to an
agreement, arrangement or understanding, written or otherwise, between
such person(s) and the plan, a plan fiduciary, or a plan participant or
beneficiary, that such advice may be considered in connection with
making investment or management decisions with respect to plan assets,
and will be individualized to the needs of the plan, a plan fiduciary,
or a participant or beneficiary.
Paragraph (c)(1)(ii)(D) of the proposal is based on the elements of
the 5-part test contained in paragraph (c)(1)(ii)(B) of the current
regulation which, as described above, requires that a person render
advice on a regular basis to the plan pursuant to a mutual agreement,
arrangement or understanding, written or otherwise, between such person
and the plan or a fiduciary with respect to the plan, that such
services will serve as a primary basis for investment decisions with
respect to plan assets, and that such person will render individualized
investment advice to the plan based on the particular needs of the plan
regarding such matters as, among other things, investment policies or
strategy, overall portfolio composition, or diversification of plan
investments. The Department notes several differences between the
proposal and current paragraph (c)(1)(ii)(B). The proposal does not
require the advice to be provided on a regular basis. The Department
has observed that in those instances where a plan fiduciary retains a
service provider such as a consultant or appraiser to render advice, it
often involves discrete advice with respect to distinct investment
transactions, such as a purchase of employer securities. The Department
does not believe that the significance of the advice on a plan
fiduciary's decisions diminishes merely because it is rendered only
once, rather than on a regular basis, or that fiduciary status under
section 3(21)(A)(ii) should depend on such a distinction. For example,
a fiduciary may retain a person to provide advice on a particular real
estate investment in the plan's portfolio, and never have a reason to
use this adviser again. Nevertheless, such advice may be critical to an
important investment decision and the plan's agreement with the adviser
may give the plan every expectation that the adviser is competent and
has no conflicts of interest. The Department also believes that removal
of the regular basis requirement will help address uncertainty under
the current regulation by eliminating difficult factual questions
relating to what constitutes a regular basis, and when it begins and
ends, and by making clear that fiduciary status applies to each
instance advice is rendered.
The proposal also does not require that the parties have a mutual
understanding that the advice will serve as a primary basis for plan
investment decisions. Nothing in ERISA compels conditioning fiduciary
status on a requirement that an adviser and plan fiduciary have a
mutual understanding as to the primacy of the advice given, in relation
to other advice or information that the fiduciary may consider in
making a decision. The Department believes that when a service provider
is retained to render advice, the plan should generally be able to rely
on the advice without regard to whether the parties intend it be a
primary or lesser basis in the fiduciary's decision-making. For
example, in a complex investment decision, a plan fiduciary may need to
consult advisers with different areas of investment expertise in order
to make a prudent decision. The relative importance of the different
kinds of advice that the plan fiduciary obtains may be impossible to
discern, and should not affect the question of whether the adviser is a
fiduciary. Accordingly, under the proposal it is sufficient if the
understanding of the parties is that the advice will be considered in
connection with making a decision relating to plan assets. The
Department also believes this modification will simplify this condition
by eliminating difficult factual issues surrounding the primacy of the
advice rendered. Other changes are editorial in nature and intended to
improve the readability of the provision.
It is important to note generally that paragraphs (c)(1)(ii)(A),
(B), (C) and (D) are independent, alternative conditions. Satisfaction
of any one of these alternative conditions may result in fiduciary
investment advice under the proposal if paragraph (c)(1)(i) also is
satisfied. For example, a bank or a broker dealer that provides
investment advice or recommendations described in paragraph (c)(1)(i)
might fall within an exclusion from the definition of ``investment
adviser'' in section 202(a)(11) of the Advisers Act, and therefore
might not meet paragraph (c)(1)(ii)(C) of the proposal. Notwithstanding
this exclusion, if the bank or broker dealer meets the requirements of
paragraphs (c)(1)(ii)(A), (B) or (D), it would nevertheless be
considered to render investment advice under the proposal.
c. Limitations
Paragraphs (c)(2) of the proposal sets forth certain limitations
with respect to the application of paragraph (c)(1).
Paragraph (c)(2)(i) provides that a person shall not be considered
to be a person described in paragraph (c)(1) with respect to the
provision of advice or recommendations if, with respect to a person
other than a person described in paragraph (c)(1)(ii)(A), such person
can demonstrate that the recipient of the advice knows or, under the
circumstances, reasonably should know, that the person is providing the
advice or making the recommendation in its capacity as a purchaser or
seller of a security or other property, or as an agent of, or appraiser
for, such a purchaser or seller, whose interests are adverse to the
interests of the plan or its participants or beneficiaries, and that
the person is not undertaking to provide impartial investment advice.
This provision reflects the Department's understanding that, in the
context of selling investments to a purchaser, a seller's
communications with the purchaser may involve advice or
recommendations, within paragraph (c)(1)(i) of the proposal, concerning
the investments offered. The Department has determined that such
communications ordinarily should not result in fiduciary status under
the proposal if the purchaser knows of the person's status as a seller
whose interests are adverse to those of the purchaser, and that the
person is not undertaking to provide impartial investment advice.
However, the Department believes there is an inherent expectation of
impartial investment advice from a person described in
[[Page 65268]]
paragraph (c)(1)(ii)(A) (involving representations or acknowledgment of
ERISA fiduciary status with respect to providing advice or
recommendations). Accordingly, paragraph (c)(2)(i) does not apply to
such a person.
As an example, if a person selling securities to a plan is a
fiduciary of the plan under section 3(21)(A)(i) or (iii) of ERISA (and
therefore in paragraph (c)(1)(ii)(B) of the proposal),\16\ or is an
investment adviser as defined in the Advisers Act (and therefore in
paragraph (c)(1)(ii)(C) of the proposal),\17\ then the person may seek
to utilize paragraph (c)(2)(i) to avoid fiduciary status under the
proposal in connection with the sale. However, if the person also makes
a representation of ERISA fiduciary status in connection with the sale,
orally or in writing, then paragraph (c)(2)(i) would not be available.
The Department intends that a person seeking to avoid fiduciary status
under the proposal by reason of the application of paragraph (c)(2)(i)
must demonstrate compliance with all applicable requirements of the
limitation.
---------------------------------------------------------------------------
\16\ The Department notes that, because such a fiduciary would
be a party in interest to the plan under section 3(14)(A) of ERISA,
such a transaction would be prohibited by section 406(a) of ERISA
unless exempt pursuant to an available statutory or administrative
prohibited transaction exemption.
\17\ The Department is not addressing any issues under the
Advisers Act related to such a transaction.
---------------------------------------------------------------------------
Paragraph (c)(2)(ii) describes certain activities taken in
connection with individual account plans that will not, in and of
themselves, be treated as rendering investment advice for purposes of
ERISA section 3(21)(A)(ii). Paragraph (c)(2)(ii)(A) clarifies that the
provision of investment education information and materials described
in 29 CFR 2509.96-1(d) will not constitute the rendering of investment
advice under section 3(21)(A)(ii) of ERISA. In 29 CFR 2509.96-1(d), the
Department identified four specific categories of information and
materials which, if furnished, alone or on combination, to plan
participants or beneficiaries would not result in the rendering of
investment advice under the current regulation. The Department reasoned
that these categories of information and materials--plan information,
general financial and investment information, asset allocation models,
and interactive materials--would not involve advice or recommendations
within the meaning of paragraph (c)(1)(i) of the current
regulation.\18\ The proposed modifications to the advice and
recommendations described in paragraph (c)(1)(i) would not change this
conclusion. This is reflected in paragraph (c)(2)(ii)(A). The
Department notes that the information and materials described in 29 CFR
2509.96-1(d) merely represent examples of the type of information and
materials that may be furnished to a participant or beneficiary without
being considered the rendering of investment advice under the proposal.
---------------------------------------------------------------------------
\18\ See generally 29 CFR 2509.96-1(d).
---------------------------------------------------------------------------
Paragraphs (c)(2)(ii)(B) and (c)(2)(ii)(C) address certain common
practices that have developed with the growth of participant-directed
DC plans. Service providers such as recordkeepers and third party
administrators sometimes make available a menu of investments from
which a plan fiduciary selects a more limited menu that will be
available under the plan for participant or beneficiary investment. The
provider may simply offer a ``platform'' of investments from which the
plan fiduciary selects those appropriate for the plan, or the provider
may select, or assist the plan fiduciary in selecting the investments
that will be available under the plan. The service provider also
sometimes retains the ability to later make changes to the plan's
investment menu, subject to advance approval by the plan fiduciary. In
some instances, the provider and the plan fiduciary clearly understand
that the provider is offering investments as to which the provider has
financial or other relationships, and is not purporting to provide
impartial investment advice regarding construction of the plan's
investment menu. In other instances, the plan fiduciary is relying on
the provider's impartial expertise in selecting an investment menu for
the plan. Also, to assist in the plan fiduciary's selection or
monitoring of investments from those made available, such a service
provider also might provide to the fiduciary general financial
information and data regarding matters such as historic performance of
asset classes and of the investments available through the provider.
To help address any uncertainty as to how these arrangements are
treated under the proposal, the Department is clarifying at paragraph
(c)(2)(ii)(B) that, with respect to an individual account plan, the
marketing or making available (e.g., through a platform or similar
mechanism), without regard to the individualized needs of the plan, its
participants, or beneficiaries, securities or other property from which
a plan fiduciary may designate investment alternatives into which plan
participants or beneficiaries may direct the investment of assets held
in, or contributed to, their individual accounts, will not, by itself,
be treated as the rendering of investment advice within the meaning of
section 3(21)(A)(ii) of ERISA if the person making available such
investments discloses in writing to the plan fiduciary that the person
is not undertaking to provide impartial investment advice.\19\
Paragraph (c)(2)(ii)(C) of the proposal further clarifies that, in
connection with the activities described in paragraph (c)(2)(ii)(B),
the provision of certain information and data to assist a plan
fiduciary's selection or monitoring of such plan investment
alternatives will not be treated as rendering investment advice if the
person providing such information or data discloses in writing to the
plan fiduciary that the person is not undertaking to provide impartial
investment advice.
---------------------------------------------------------------------------
\19\ The Department notes, however, that such a service
provider's substitution or deletion of investment options selected
by a plan fiduciary may, depending on the surrounding facts and
circumstances, constitute an exercise of ``authority or control
respecting management or disposition of [a plan's] assets'' within
the meaning of section 3(21)(A)(i) of ERISA. See Advisory Opinion
97-16A (May 22, 1997).
---------------------------------------------------------------------------
The Department recognizes that compliance with a number of ERISA's
reporting and disclosure provisions requires information on the value
of plan assets. The Department does not intend, as a general matter,
for such information provided solely for compliance purposes to fall
within the type of advice described under that proposal. Paragraph
(c)(2)(iii) provides that advice described in paragraph (c)(1)(i)(A)(1)
does not encompass the preparation of a general report or statement
that merely reflects the value of an investment of a plan or a
participant or beneficiary, provided for purposes of compliance with
the reporting and disclosure requirements of the Act, the Internal
Revenue Code, and the regulations, forms and schedules issued
thereunder, unless such report involves assets for which there is not a
generally recognized market and serves as a basis on which a plan may
make distributions to plan participants and beneficiaries.
[[Page 65269]]
d. Fee Requirement
A necessary element of fiduciary status under section 3(21)(A)(ii)
of ERISA is that a person must render investment advice for a fee or
other compensation, direct or indirect. Paragraph (c)(3) provides that
purposes of section 3(21)(A)(ii), a fee or other compensation, direct
or indirect, received by a person for rendering investment means any
fee or compensation for the advice received by the person (or by an
affiliate) from any source and any fee or compensation incident to the
transaction in which the investment advice has been rendered or will be
rendered. For example, the term fee or compensation includes, but is
not limited to, brokerage, mutual fund sales, and insurance sales
commissions. It includes fees and commissions based on multiple
transactions involving different parties.
e. Application Under Code Section 4975
Code section 4975(e)(3) contains a provision that is parallel to
ERISA section 3(21)(A)(ii) and defines the term ``fiduciary'' for
purposes of the prohibited transaction excise tax provisions in Code
section 4975. In 1975, the Department of the Treasury issued a
regulation under Code section 4975(e)(3), found at 26 CFR 54.4975-9(c),
that parallels 29 CFR 2510.3-21(c). Under section 102 of Reorganization
Plan No. 4 of 1978, 5 U.S.C. App. 1 (1996), the authority of the
Secretary of the Treasury to interpret section 4975 of the Code has
been transferred, with certain exceptions not here relevant, to the
Secretary of Labor. Paragraph (c)(4) clarifies that the proposed
amendments to the definition of the term ``fiduciary'' in 29 CFR
2510.3-21(c) also apply for purposes of the application of Code section
4975 with respect to any plan described in Code section 4975(e)(1),
regardless of whether such plan is an employee benefit plan.
C. Effective Date
The Department proposes that the regulations contained in this
document will be effective 180 days after publication of the final
regulations in the Federal Register. The Department invites comments on
whether the final regulations should be made effective on a different
date.
D. Request for Comment
The Department invites comments from interested persons on the
proposed rule. To facilitate the receipt and processing of comment
letters, the EBSA encourages interested persons to submit their
comments electronically by e-mail to e-ORI@dol.gov (enter into subject
line: Definition of Fiduciary Proposed Rule) or by using the Federal
eRulemaking portal at http://www.regulations.gov. Persons submitting
comments electronically are encouraged not to submit paper copies.
Persons interested in submitting paper copies should send or deliver
their comments to the Office of Regulations and Interpretations,
Employee Benefits Security Administration, Attn: Definition of
Fiduciary Proposed Rule, Room N-5655, U.S. Department of Labor, 200
Constitution Avenue, NW., Washington, DC 20210. All comments will be
available to the public, without charge, online at http://
www.regulations.gov and http://www.dol.gov/ebsa and at the Public
Disclosure Room, N-1513, Employee Benefits Security Administration,
U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210.
The comment period for the proposed regulations will end 90 days
after publication of the proposed rule in the Federal Register. The
Department believes that this period of time will afford interested
persons an adequate amount of time to analyze the proposal and submit
comments. Written comments on the proposed rule should be submitted to
the Department on or before January 20, 2011.
E. Regulatory Impact Analysis
1. Executive Order 12866 Statement
Under Executive Order 12866 (58 FR 51735), the Department must
determine whether a regulatory action is ``significant'' and therefore
subject to review by the Office of Management and Budget (OMB). Section
3(f) of the Executive Order defines a ``significant regulatory action''
as an action that is likely to result in a rule (1) having an annual
effect on the economy of $100 million or more, or adversely and
materially affecting a sector of the economy, productivity,
competition, jobs, the environment, public health or safety, or State,
local or Tribal governments or communities (also referred to as
``economically significant''); (2) creating a serious inconsistency or
otherwise interfering with an action taken or planned by another
agency; (3) materially altering the budgetary impacts of entitlement
grants, user fees, or loan programs or the rights and obligations of
recipients thereof; or (4) raising novel legal or policy issues arising
out of legal mandates, the President's priorities, or the principles
set forth in the Executive Order. OMB has determined that this rule is
economically significant within the meaning of section 3(f)(1) of the
Executive Order, because it is likely to have an effect on the economy
of $100 million in any one year. Accordingly, OMB has reviewed the rule
pursuant to the Executive Order. The Department performed a
comprehensive, unified analysis to estimate the costs and, to the
extent feasible, provide a qualitative assessment of benefits
attributable to the proposed rule for purposes of compliance with
Executive Order 12866 and the Regulatory Flexibility Act. The analysis
is summarized in Table 1, below.
[[Page 65270]]
Table 1--Accounting Table
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Benefits
----------------------------------------------------------------------------------------------------------------
Annualized Monetized ($millions/year)--Not Quantified.
----------------------------------------------------------------------------------------------------------------
Qualitative: The proposed regulation's new definition of when a person is considered a ``fiduciary'' of a
pension plan by reason of providing investment advice will discourage harmful conflicts of interest, improve
service value, and enhance the Department's ability to redress abuses and more effectively and efficiently
allocate its enforcement resources. The proposed regulation also should help plans by giving them a means to
seek recoupment of losses and disgorgement of ill-gotten gains from those newly-considered fiduciaries who
engage in misconduct. While most of the recoupment will be transfers, they are welfare improving, because they
return money to plans that would not have been taken from them if the service provider had been acting in the
best interest of the plan and its participants and beneficiaries as required by ERISA. Given the magnitude of
plan assets that may be affected, even a small service value improvement by a moderate number of plans could
yield economically significant benefits.
----------------------------------------------------------------------------------------------------------------
Costs................................................... Estimate Year dollar Discount Period
rate covered
----------------------------------------------------------------------------------------------------------------
Annualized Monetized ($millions/year) for service 2.1 2010 7% 2011-2020
provider compliance review and implementation costs....
1.9 2010 3% 2011-2020
----------------------------------------------------------------------------------------------------------------
Annualized Monetized ($millions/year) for higher costs of doing business for service providers not previously
covered by the fiduciary definition--Not Quantified.
----------------------------------------------------------------------------------------------------------------
Qualitative: An increased number of service providers could become fiduciaries to the plans to whom they provide
services. These service providers could experience higher costs of doing business due to increased liability.
To the extent costs and liabilities rise, the plan service provider market could become compressed if plan
service providers leave the market. As more service providers become fiduciaries, more transactions could
violate ERISA prohibited transaction rules. Absent applicable prohibited transaction exemptions, service
providers would have to restructure transactions and/or modify business practices.
----------------------------------------------------------------------------------------------------------------
2. Background and Need for Regulatory Action
As stated earlier in this preamble, section 3(21)(A)(ii) of ERISA
defines a fiduciary as a person that renders investment advice to a
plan for a fee or other compensation, direct or indirect, with respect
to any moneys or other property of such plan, or has any authority or
responsibility to do so. In 1975, shortly after ERISA was enacted, the
Department adopted a regulation \20\ that significantly limited the
broad statutory language. The current regulation provides that a person
provides ``investment advice'' for purposes of section 3(21)(A)(ii) of
ERISA only if it renders advice as to the purchase, sale, or value of
securities or other property and either has discretionary authority or
control with respect to the purchase of property for the plan, or, in
the alternative, the person (1) renders advice as to the purchase,
sale, or value of securities or other property, (2) on a regular basis,
(3) pursuant to a mutual agreement, arrangement or understanding,
written or otherwise, between such person and the plan or a plan
fiduciary, that (4) the advice will serve as a primary basis for
investment decisions with respect to plan assets, and that (5) the
advice will be individualized based on the particular needs of the plan
(hereinafter referred to as the ``five-part test'').\21\ Under the
current regulation, a plan service provider must satisfy each element
of the five-part test in order to be considered a fiduciary under ERISA
section 3(21)(A)(ii) unless the service provider renders advice and has
discretionary authority or control with respect to purchasing or
selling securities or other property for the plan.
---------------------------------------------------------------------------
\20\ 29 CFR 2510.3-21(c).
\21\ The scope of the regulation was further limited by the
Department in a 1976 advisory opinion (AO 76-65), in which it
concluded that, under the facts described therein, a valuation of
closely held employer securities that would be relied on in the
purchase of the securities by an employee stock ownership plan
(ESOP) would not constitute investment advice under the regulation.
---------------------------------------------------------------------------
The current regulation has not been updated since it was
promulgated in 1975. Since that time, the design and operation of
employee benefit plans has changed significantly. One of the most
dramatic changes has been the growth of defined contribution (DC)
plans, specifically, 401(k) plans, which did not exist when the current
regulation was promulgated. Department of Labor data show that from
1975 through 2007, the percentage of active participants covered by DC
plans grew from 29% to 78% and 90% of these active DC plan participants
were covered by 401(k) plans.\22\ Importantly, about 89% of 401(k)
plans covering 95% of all active 401(k) plan participants are
participant-directed, which means that participants make investment
decisions regarding the investment of assets held in their individual
accounts by choosing from a diverse menu of designated investment
alternatives selected by plan sponsors.
---------------------------------------------------------------------------
\22\ See U.S. Department of Labor, Employee Benefits Security
Administration, ``Private Pension Plan Bulletin Historical Tables
and Graphs,'' January 2010, p. 1. This document can be found at
http://www.dol.gov/ebsa/pdf/1975-2007historicaltables.pdf. Please
note that the number of active participants in 1975 and 2007 are not
directly comparable because of adjustments in the definition of a
participant. This adjustment is explained in detail in the
historical tables and graphs.
---------------------------------------------------------------------------
In 2009, the Government Accountability Office (GAO) found that many
opportunities exist in the 401(k) marketplace for plans to hire service
providers that have business arrangements that could give rise to
conflicts of interest.\23\ For example, the GAO noted that plans often
hire consultants and other advisers to provide advice regarding
investment options and products that should be offered under the plan
and to monitor the performance of the selected investments. In some
cases, consultants receive compensation from the investment companies
whose products they recommend to the plan, which could lead them to
steer the plans toward products for which they receive additional
compensation. These arrangements can be harmful to plan
[[Page 65271]]
participants, because the plan may pay excessive fees for the provided
services, which could lower returns. Participants in participant-
directed 401(k) plans are especially vulnerable in these situations,
because they must rely on the assets in their individual accounts to
meet their retirement income needs.
---------------------------------------------------------------------------
\23\ See, GAO, Conflicts of Interest Can Affect Defined Benefit
and Defined Contribution Plans, GAO-09-503T, Testimony Before the
Subcommittee on Health, Employment, Labor and Pensions, Education
and Labor Committee, House of Representatives (March 24, 2009),
accessible at http://www.gao.gov/new.items/d09503t.pdf.
---------------------------------------------------------------------------
There also is a greater potential for conflicts of interest to
exist in the defined benefit pension plan service provider market than
when the current regulation was promulgated. Due to the increased
complexity of investment opportunities available to defined benefit
plans, plan sponsors often seek investment advice from a broad range of
service providers. Some of these service providers have business
arrangements that can give rise to conflicts of interest. For example,
in a May 2005 study,\24\ the Securities and Exchange Commission (SEC)
staff found that 13 of the 24 pension consultants examined or their
affiliates had undisclosed conflicts of interest, because they provided
products and services to pension plan advisory clients, money managers,
and mutual funds on an ongoing basis without adequately disclosing
these conflicts. The SEC staff also found that the majority of examined
pension consultants had business relationships with broker-dealers that
raised a number of concerns about potential harm to pension plans.
---------------------------------------------------------------------------
\24\ See U.S. Securities and Exchange Commission, Office of
Compliance Inspections and Examinations, Staff Report Concerning
Examination of Select Pension Consultants (Washington, DC: May 16,
2005.). The report's findings were based on a 2002 to 2003
examination of 24 pension consultants. The report can be accessed at
http://www.sec.gov/news/studies/pensionexamstudy.pdf.
---------------------------------------------------------------------------
The current regulation's narrow approach to fiduciary status
sharply limits the Department's ability to protect plans and their
participants and beneficiaries from conflicts of interest that may
arise from the diverse and complex fee practices existing in today's
retirement plan services market and to devise effective remedies for
misconduct when it occurs. In recent years, non-fiduciary service
providers--such as consultants, appraisers, and other advisers--have
abused their relationships with plans by recommending investments in
exchange for undisclosed kickbacks from investment providers, engaging
in bid-rigging, misleading plan fiduciaries about the nature and risks
associated with plans investments, and by giving biased,\25\
incompetent, and unreliable valuation opinions. Yet, no matter how
egregious the abuse, plan consultants and advisers have no fiduciary
liability under ERISA, unless they meet every element of the five-part
test.
---------------------------------------------------------------------------
\25\ The GAO found that DB pension plans using consultants with
SEC-identified undisclosed conflicts earned returns 130 basis points
lower than the others, which implies that bias may taint
consultants' advice. See e.g., GAO, Conflicts of Interest Involving
High Risk of Terminated Plans Pose Enforcement Challenges, Defined
Benefit Pension Report (June 2007), at http://www.gao.gov/new.items/
d07703.pdf.
---------------------------------------------------------------------------
In instances where a plan has relied upon abusive investment advice
from a self-dealing consultant concerning an investment product on a
single occasion, the Department would be unable to bring an action for
fiduciary breach against the consultant, because the ``regular basis''
element of the current regulation's five-part test would not be
satisfied. The consultant would be absolved of liability regardless of
the severity of the abuse or the extent of the plan's reliance. This is
true even if the consultant engaged in precisely the same conduct that
would have been per se illegal if committed by an equally culpable
consultant that met the current regulation's ``regular basis'' test.
For example, a plan's purchase of annuity contracts is a major
transaction, but it may occur only in connection with the plan's
termination. As a result, the Department could not pursue a civil
enforcement action against an insurance brokerage company for accepting
kickbacks from an annuity carrier while advising plans for a fee
regarding the selection of annuity contracts. Even where the brokerage
company's recommendation was the primary basis for the plan's choice of
annuity providers, the brokers could not be held accountable as
fiduciaries because the advice would not have been offered on a regular
basis.
Another anomaly associated with the current regulation is that the
five-part test applies even to persons who represent themselves to the
plan as fiduciaries in rendering investment advice. For example, a
consultant could hold itself out as a plan fiduciary in a written
contract with the plan, render investment advice for a fee, and still
evade fiduciary status by showing that its advice was insufficiently
``regular,'' did not serve as a ``primary basis'' for the decision, or
otherwise failed to meet each element of the five-part test. The
current test also makes it easy for consultants to structure their
actions to avoid fiduciary status. The SEC found evidence of this
practice in its pension consultants examination and made the following
statement regarding this issue in its report: ``Many pension
consultants believe they have taken appropriate actions to insulate
themselves from being considered a `fiduciary' under ERISA. As a
result, it appears that many consultants believe they do not have any
fiduciary relationships with their advisory clients * * *.'' \26\
---------------------------------------------------------------------------
\26\ See U.S. Securities and Exchange Commission, Office of
Compliance Inspections and Examinations, Staff Report Concerning
Examination of Select Pension Consultants, p. 6 (Washington, DC: May
16, 2005).
---------------------------------------------------------------------------
An adviser's recommendation may involve significant sums and
matters of specialized expertise, and it may include professions of
impartiality. However, unless the advice meets each element of the
current regulation's 5-part test, ERISA's remedies for lack of due
diligence and disloyalty are unavailable to the plan.
In contrast, when a fiduciary uses its position of trust to enrich
itself by engaging in self-dealing and subordinating the plans'
interests to its own, it violates numerous provisions of ERISA,
including its duty of loyalty provided in section 404 of ERISA and the
prohibitions on self-dealing provided in section 406(b) of ERISA. Such
a fiduciary also exposes itself to the broadest possible range of
remedies under ERISA.
Applying the current regulation in today's service provider market
has had a detrimental impact on EBSA's allocation of its enforcement
resources. EBSA seeks to focus its enforcement resources on areas that
have the greatest impact on the protection of plan assets and
participants' benefits. To accomplish this goal, EBSA requires its
field offices to place particular emphasis on certain national
enforcement projects. The determination of fiduciary status is
particularly important to two national enforcement projects: The
Employee Stock Ownership Plan (ESOP) Project and the Consultant/Adviser
Project (CAP).
The ESOP project is designed to identify and correct violations of
ERISA in connection with ESOPs, which are designed to invest primarily
in employer securities. CAP focuses on the receipt of improper or
undisclosed compensation by employee benefit plan consultants and other
investment advisers. EBSA's investigations seek to determine whether
the receipt of such compensation, even when disclosed, violates ERISA
because the adviser/consultant leveraged its position with a benefit
plan to generate additional fees for itself or its affiliates. When
ERISA violations are uncovered, EBSA will seek corrective action for
past violations as well as prospective relief to deter future
violations.
One of the most critical elements in bringing enforcement actions
under the ESOP and CAP initiatives is establishing
[[Page 65272]]
that a service provider is a fiduciary. In order to make this
determination, investigators must gather evidence to support a finding
for each element of the five-part test. In all cases, the analysis
necessary to determine fiduciary status is very fact-intensive and
requires extensive review of plan documents and contracts, client
files, e-mails, investment documentation, accounting records, and
interview statements to be obtained from service providers and their
affiliates. Consequently, EBSA investigators routinely devote
disproportionate time and resources establishing all elements of the
five-part test, rather than focusing on the precise misconduct at issue
in particular cases.
Based on the foregoing, the Department has determined that
regulatory action is necessary to adopt a definition of the term
``fiduciary'' that more closely reflects the broad statutory definition
of the term, recognizes the diverse and complex fee practices that
exist in today's service provider market and their potential conflicts,
accounts for the shift from DB to DC plans, expands the scope of
fiduciary protections for plans and their participants and
beneficiaries, and permits EBSA investigators and attorneys to focus
their efforts on the adviser's conduct rather than meeting the
evidentiary requirements necessary to prove that all elements of the
current regulation's five-part test are satisfied. As discussed in
further detail below, the Department believes that amending the current
regulation by broadening the scope of service providers that would be
considered fiduciaries would enhance the Department's ability to
redress service provider abuses that currently exist in the market,
such as undisclosed fees, misrepresentation of compensation
arrangements, and biased appraisals of the value of employer securities
and other plan investments.
4. Affected Entities
The Department used data from the Schedule C of the 2007 Form 5500,
the latest available complete data, to estimate the universe of plan
service providers that would be affected by the proposed rule.
Generally, plans with 100 or more participants are required to report
on Schedule C persons who rendered services to or who had transactions
with the plan during the reporting year if the person received,
directly or indirectly, $5,000 or more in reportable compensation in
connection with services rendered or their position with the plan. The
type of services provided by each service provider also must be
reported. Based on the Schedule C service codes, the Department
estimates that 5,300 unique service providers most likely provide
investment- and valuation-related services covered under the proposed
rule that could cause them to be considered fiduciaries. In order to
provide a reasonable estimate, service providers reporting service
codes corresponding to brokerage (real estate), brokerage (stocks,
bonds, commodities), consulting (general), insurance agents and
brokers, valuation services (appraisals, asset valuation, etc.) and
investment evaluations were assumed to provide covered services. Note
that the code for investment advisory services was omitted, because we
assume that such service providers are ERISA fiduciaries.
The Department acknowledges that its estimate may be imprecise.
Although some small plans file Schedule C, small plans generally are
not required to complete Schedule C. Therefore, there would be an
underestimate of covered services providers to small plans if a
substantial number of the service providers only service small plans.
The Department, however, believes that its estimated number of covered
service providers is reasonable, because most small plans use the same
service providers as large plans.\27\ The Department invites comments
regarding this estimate.
---------------------------------------------------------------------------
\27\ While in general small plans are not required to file a
Schedule C, some voluntarily file. Looking at Schedule C filings by
small plans, the Department verified that most small plans reporting
data on Schedule C used the same group of service providers as
larger plans.
---------------------------------------------------------------------------
5. Benefits
The Department expects that amending its current regulation
defining the circumstances under which a person is a fiduciary under
ERISA as a result of providing investment advice will discourage
harmful conflicts, improve service value, and enhance the Department's
ability to redress abuses and more effectively and efficiently allocate
its enforcement resources. Although the Department is unable to
quantify these benefits, the Department tentatively concludes they
would justify their cost.
a. Discouraging Harmful Conflicts
Harmful arrangements generally are those that are tainted by
unmitigated conflicts. These arrangements occur when a plan's service
providers strike deals that profit one another at the plan's expense or
subordinate the plan's interest to someone else's. As mentioned
earlier, in a 2005 report,\28\ SEC staff identified certain undisclosed
arrangements in the business practices of pension consultants that can
give rise to conflicts of interest. The SEC found that the objectivity
of advice provided by the examined pension consultants was called into
question, because many pension consultants provided services both to
pension plans who are their clients and money managers. In the report,
the SEC stated that this raises concerns that pension consultants may
steer clients to certain money managers and other vendors based on the
consultant's other business relationships and receipt of fees from
these firms, rather than because selecting the money manager or other
vendor was in the best interest of the plan and its participants and
beneficiaries.
---------------------------------------------------------------------------
\28\ See U.S. Securities and Exchange Commission, Office of
Compliance Inspections and Examinations, Staff Report Concerning
Examination of Select Pension Consultants, p. 5 (Washington, DC: May
16, 2005).
---------------------------------------------------------------------------
Also, as noted earlier in this Regulatory Impact Analysis, a recent
GAO study links undisclosed conflicts with 130 basis points of
underperformance in defined benefit pension plans.\29\ A variety of
academic studies further support the hypothesis that conflicts often
erode the value provided to defined contribution pension plans by
mutual funds and their distribution channels.\30\
---------------------------------------------------------------------------
\29\ See, GAO, Conflicts of Interest Can Affect Defined Benefit
and Defined Contribution Plans, GAO-09-503T, Testimony Before the
Subcommittee on Health, Employment, Labor and Pensions, Education
and Labor Committee, House of Representatives (March 24, 2009),
accessible at http://www.gao.gov/new.items/d09503t.pdf.
\30\ Examples include: Daniel B. Bergstresser et al., Assessing
the Costs and Benefits of Brokers in the Mutual Fund Industry,
Social Science Research Network Abstract 616981 (Sept. 2007). Mercer
Bullard et al., Investor Timing and Fund Distribution Channels,
Social Science Research Network Abstract 1070545 (Dec. 2007). Xinge
Zhao, The Role of Brokers and Financial Advisors Behind Investment
Into Load Funds, China Europe International Business School Working
Paper (Dec. 2005), at http://www.ceibs.edu/faculty/zxinge/
brokerrole-zhao.pdf.
---------------------------------------------------------------------------
Beneficial arrangements generally are those in which a plan's
service providers, in competition to provide the best value to the
plan, deliver high quality services to the plan at the lowest cost, and
act solely in the interest of their plan clients and the plan's
participants and beneficiaries. According fiduciary status to certain
service providers that provide investment advice and valuation services
to plans and their participants, and subjecting them to the full extent
of remedies under ERISA, would discourage harmful conflicts and create
[[Page 65273]]
more beneficial arrangements in the pension plan service provider
market by deterring service providers from engaging in self-dealing,
acting imprudently, and subordinating their plan clients' interests to
other interests due to the liability exposure and negative publicity
that would result from being sued for a fiduciary breach under ERISA.
b. Improved Service Value
Under the proposal, certain service providers that are not
fiduciaries under the Department's current regulation would be
determined to be fiduciaries under ERISA. Based on this change, the
Department expects that affected service providers will modify their
business practices to ensure that they act solely in the interests of
their employee benefit plan clients and the plans' participants and
beneficiaries as required by section 404 of ERISA. Therefore, plans
should receive better value for the service fees they pay. Advisers are
more likely to act in accordance with ERISA's high fiduciary standards
if they know that they may be held to them. Where a plan suffers a loss
because of an investment adviser's imprudence or actions contrary to
the plan's interests, the plan will have remedies under ERISA to recoup
its losses and disgorge the adviser's ill-gotten gains. This should
provide the ancillary benefit of improved returns on plan assets and
larger account balances for participants and beneficiaries of
individual account plans.
While the improvement in service value that may result from the
proposed rule is difficult to quantify, the Department believes that it
has the potential to be very large. If just 10 percent of plans realize
a one basis point (0.01 percent of plan assets) service value
improvement, it would be worth approximately $399 million over ten
years using a seven percent discount rate and reporting in 2010
dollars. In addition, GAO's study linking undisclosed conflicts with
130 basis points of underperformance suggests that value can be
improved via service quality as well as price.\31\ Viewed in this
context, the Department is confident that service value improvement
could be substantial as a result of the proposed rule and may be
economically significant (i.e., exceed $100 million annually).
---------------------------------------------------------------------------
\31\ See, GAO, Conflicts of Interest Can Affect Defined Benefit
and Defined Contribution Plans, GAO-09-503T, Testimony Before the
Subcommittee on Health, Employment, Labor and Pensions, Education
and Labor Committee, House of Representatives (March 24, 2009),
accessible at http://www.gao.gov/new.items/d09503t.pdf.
---------------------------------------------------------------------------
c. Improve Department's Ability To Redress Abuse and Improve
Enforcement Resource Allocation
Amending the Department's current regulation by broadening the
scope of service providers that would be considered fiduciaries would
enhance the Department's ability to redress service provider abuses
that currently exist in the market, such as undisclosed fees,
misrepresentation of compensation arrangements, and biased appraisals
of the value of employer securities and other plan investments.\32\ It
also would allow the Department to more effectively and efficiently
allocate its enforcement resources, which would directly benefit plans
and their participants and beneficiaries by providing greater
protections than are available under the current regulation.
---------------------------------------------------------------------------
\32\ Please note that Department's proposal also would benefit
participants and beneficiaries of ERISA-covered plans, because
section 502(a)(2) of ERISA allows them to assert a private right of
action against plan fiduciaries who breach any of the
responsibilities, obligations, or duties imposed on fiduciaries
under Title I of ERISA.
---------------------------------------------------------------------------
Specifically, the proposed rule would improve the Department's
ability to redress abuse, provide additional protection to plans and
their participants and beneficiaries, and allocate its enforcement
resources by:
Including as fiduciary investment advice appraisals and
fairness opinions concerning value of securities or other property;
According fiduciary status to persons who render
investment advice for a fee to a plan, its participants or
beneficiaries and directly or indirectly represent or acknowledge that
they are acting as a fiduciary within the meaning of ERISA in rendering
the advice; and
Expediting the resolution of difficult factual questions
and enforcement challenges by removing the requirements in the current
regulation's five-part test that investment advice must be provided on
a regular basis based on the parties' mutual understanding and that the
advice will serve as a primary basis for plan investment decisions.
These benefits are discussed in more detail below.
Appraisals and Valuation Opinions: As discussed earlier in this
preamble, EBSA's national ESOP enforcement project is focused on
identifying and correcting violations of ERISA in connection with
ESOPs, which are designed to invest primarily in employer securities. A
common violation found in the ESOP national enforcement project arises
in cases where plan fiduciaries have reasonably relied on faulty
valuations of securities prepared by professional appraisers. The
proposed rule, which would supersede AO 76-65A, and therefore would
apply to appraisals and fairness opinions rendered in connection with
plan investment transactions would align the duties of persons who
provide appraisals with those of fiduciaries who rely on these
appraisals. As noted above, the provision in the proposed rule is not
limited to employer securities.
Persons Holding Themselves Out as Fiduciaries: The proposed rule
provides that a person is a fiduciary if it (1) renders investment
advice described in the proposal to a plan, plan fiduciary, or plan
participant or beneficiary for a fee or other compensation and (2)
directly or indirectly represents or acknowledges that it is acting as
a fiduciary within the meaning of ERISA with respect to the plan in
rendering the advice. Many pension plans rely heavily on the expert
guidance provided by consultants and other advisers in managing the
investment of plan assets. The Department believes that claiming ERISA
fiduciary status enhances the adviser's influence, and gives the advice
recipient a reasonable expectation that the advice will be impartial
and prudent. Therefore, the proposed rule provides that such a
representation or acknowledgment in connection with advice is
sufficient to constitute investment advice under the proposal which, if
rendered for a direct or indirect fee or other compensation, would
result in fiduciary status under section 3(21)(A)(ii) of ERISA.
Simplifying Current Rule's Five-Part Test: As stated earlier in
this preamble, EBSA's CAP project focuses on the receipt of improper,
undisclosed compensation by pension consultants and other investment
advisers, and whether the receipt of such compensation violates ERISA,
because the adviser/consultant used its position with a benefit plan to
generate additional fees for itself or its affiliates. One of the most
substantial impediments confronting CAP investigators when bringing
enforcement actions under the CAP program is proving that all elements
of the current rule's five-part test are met. As stated earlier, CAP
investigators spend an inordinate amount of time gathering evidence to
satisfy all elements of the five-part test rather than focusing on the
misconduct involved in a particular case.
The proposed rule would remove this impediment by eliminating the
[[Page 65274]]
requirement that advice must be provided on a ``regular basis.'' This
condition bears no necessary relationship to the importance of the
advice to the plan or the culpability of the adviser. The proposal also
does not require the parties to have a mutual understanding that the
advice will serve as a ``primary basis'' for plan investment decisions.
This should allow EBSA to more efficiently allocate its enforcement
resources, because investigators no longer would need to devote
disproportionate time to prove that these elements of the five-part
test are met.
6. Costs
The Department estimated the costs for the proposal over the ten-
year time frame for purposes of this analysis and used information from
the quantitative characterization of the service provider market
presented above as a basis for these cost estimates. This
characterization did not account for all service providers, but it does
provide information on the segments of the service provider industry
that are likely to be most affected by the proposal (i.e., those who
provide investment- and valuation-related services to employee benefit
plans).
Most of the cost of the rule would be imposed on affected plan
service providers. These service providers would need to review the
proposed rule and determine whether their current service provider
contracts and arrangements with plans, or activities carried out
pursuant to them, would make them fiduciaries under the proposal.
For purposes of this analysis, the Department assumes that all
affected service providers will incur these initial compliance review
costs. The Department believes that service providers will need to
review their entire book of business, not each individual transaction
or a plan-by-plan review, to determine whether they are fiduciaries,
because service providers will enter into agreements with plans to
provide similar types of services. The Department assumes that affected
service providers will require on average 16 hours of legal
professional time at a cost of approximately $119 per hour to perform
the compliance review. Based on the foregoing, this cost is estimated
to be approximately $10.1 million in the first year.
The Department also has estimated the initial compliance review and
implementation costs for service providers newly entering the market
(``new service providers'') to provide services to plans (either for
the first time or by re-entry) beginning in 2012 and each year
thereafter. The Department assumes that about eight percent of all
service providers will be new in each year subsequent to 2011,\33\ and
that these service providers will incur the same compliance review and
implementation costs as existing service providers. Based on the
foregoing, the Department estimates that new service providers will
incur costs of approximately $845,000 in 2012 and thereafter. Estimates
of the cost of the rule over the first ten years are reported in Table
2, below.
---------------------------------------------------------------------------
\33\ Estimate based on the Department's comparison of data
reported on the 2005 and 2006 Form 5500.
---------------------------------------------------------------------------
The Department's estimate regarding the time required for service
providers to complete the compliance review to determine whether they
are fiduciaries under the proposal as a result of providing investment
advice to a plan or a plan participant or beneficiary is based on an
average cost for large and small service providers to conduct the
review. In developing this estimate, the Department has accounted for
the fact that large service providers may require more time than small
service providers to complete the compliance review due to the wide
range of services they provide and the complexity of their business
arrangements and affiliate relationships. The Department believes that
the burden for service providers to complete the compliance review is
mitigated by the fact that the proposal sets forth discrete types of
advice and recommendations that constitute investment advice for
purposes of ERISA section 3(21)(A)(ii). The Department welcomes public
comments regarding this estimate.
Table 2--Monetized Costs of Rule (2010 Dollars)
----------------------------------------------------------------------------------------------------------------
Cost of legal
review Total 3% Total 7%
Year undiscounted discounting discounting
(A)
----------------------------------------------------------------------------------------------------------------
2011......................................................... $10,138,000 $10,138,000 $10,138,000
2012......................................................... 845,000 820,000 790,000
2013......................................................... 845,000 796,000 738,000
2014......................................................... 845,000 773,000 690,000
2015......................................................... 845,000 751,000 644,000
2016......................................................... 845,000 729,000 602,000
2017......................................................... 845,000 708,000 563,000
2018......................................................... 845,000 687,000 526,000
2019......................................................... 845,000 667,000 492,000
2020......................................................... 845,000 647,000 460,000
--------------------------------------------------
Total.................................................... 17,741,000 16,715,000 15,642,000
----------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.
7. Regulatory Alternatives
As discussed elsewhere in the preamble to the proposal, plan
service providers that fall within the Department's rule might
experience increased costs and liability exposure associated with ERISA
fiduciary status. Consequently, these service providers might charge
higher fees to plan clients, or limit or discontinue the availability
of their services or products to ERISA plans. As further discussed
below, the Department considered but rejected two regulatory
alternatives, because these alternatives could lead to higher fees for
plans and a compression of the plan service provider market.
[[Page 65275]]
In developing this proposal, the Department sought to broaden the
scope of the persons treated as ERISA fiduciaries, without creating an
overly-broad or ambiguous standard that might unnecessarily
disadvantage plans. As an alternative, the Department considered a
proposal that would replace the current regulatory definition with the
language of section 3(21)(A)(ii) of ERISA, which provides simply that a
person is a fiduciary if it renders investment advice for a fee or
other compensation, direct or indirect, with respect to any moneys or
other property of a plan, or has any authority or responsibility to do
so. However, the Department believes this approach would not provide
sufficient clarity for persons to determine whether they are ERISA
fiduciaries. Without a sufficiently clear standard, a broad range of
plan service providers, in order to mitigate or avoid any potential
risks, might simply presume fiduciary status and charge higher fees to
plan clients, or limit or discontinue the availability of their
services or products to ERISA plans. The Department rejected this
alternative. The Department's proposal attempts to identify fiduciaries
based on readily-ascertainable criteria related to their degree of
authority, control, responsibility or influence and the expectations of
the parties involved.
The Department considered another alternative that would not have
included in the proposal an explicit limitation applicable to service
providers that offer of a ``platform'' of investment options. Defined
contribution plans that permit participants to direct the investment of
assets allocated to their accounts have become increasingly popular.
Often, the service provider offering a platform, as an incidental part
of its overall services, also provides the plan sponsor with general
information and assistance in assessing the investments available for
inclusion in the plan's platform. The Department rejected this
alternative, because if the proposal does not provide sufficient
clarity as to whether their activities related to offering an
investment platform would result in fiduciary status, these service
providers might increase their fees, limit the types of investment-
related information made available to plan sponsors, or cease offering
their services to plans. In order to provide clarity, the Department's
proposal attempts to describe the circumstances under which merely
offering a platform of investment options, and certain incidental
services, will not cause a person to become an ERISA fiduciary.
8. Uncertainty
The Department's estimates of the effects of this proposed rule are
subject to uncertainty. The Department is confident that adopting a new
definition of the term ``fiduciary'' should discourage harmful
conflicts of interest, improve service value, and enhance the
Department's ability to redress abuses and more effectively and
efficiently allocate its enforcement resources. However, it is
uncertain about the magnitude of these benefits and potential costs. It
is possible this rule could have a large market impact.
For example, the Department is uncertain regarding whether, and to
what extent, service provider costs would increase due to the proposed
rule, and if so, whether the increased cost would be passed on to
plans. The Department expects that more service providers would be
determined to be fiduciaries under the proposed rule than under the
current regulation. These service providers could experience higher
costs of doing business due to the increased liability exposure that is
associated with ERISA fiduciary status, such as fiduciary liability
insurance costs, which could result in higher fees for their plan
clients. The Department also is uncertain whether the service provider
market will shrink because some service providers would view the
increased costs and liability exposure associated with ERISA fiduciary
status as outweighing the benefit of continuing to service the ERISA
plan market. The Department does not have enough information to provide
a specific number. However, it is possible that many plans currently
employ service providers who would be considered fiduciaries for the
first time under the proposal.
Also, if more service providers are fiduciaries, more transactions
would violate the self-dealing prohibitions contained in ERISA section
406(b). In order to avoid committing prohibited transactions, affected
service providers would have to identify transactions that would be
prohibited because they involve self-dealing, restructure these
transactions, and modify their business practices in the absence of an
applicable statutory, class, or individual prohibited transaction
exemption. The Department is uncertain regarding the number of
transactions that would have to be restructured, whether an applicable
prohibited transaction exemption would be available for such
transactions, and if not, the number of prohibited transactions
exemption applications the Department could expect to receive regarding
the transactions. The Department welcomes public comments regarding
this issue.
The Department believes its assumptions are reasonable based on the
available information and tentatively concludes that the proposed
regulation's benefits would justify its costs. The Department invites
comments that will help it assess the impact of areas where it is
uncertain.
9. Regulatory Flexibility Act
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes
certain requirements with respect to Federal rules that are subject to
the notice and comment requirements of section 553(b) of the
Administrative Procedure Act (5 U.S.C. 551 et seq.) and which are
likely to have a significant economic impact on a substantial number of
small entities. Unless an agency determines that a proposal is not
likely to have a significant economic impact on a substantial number of
small entities, section 603 of the RFA requires the agency to present
an initial regulatory flexibility analysis (IRFA) of the proposed rule.
The Department's IRFA of the proposed rule is provided below.
a. Need for and Objectives of the Rule
The Department has determined that regulatory action is necessary
to adopt a definition of the term ``fiduciary'' that more closely
reflects the broad statutory definition of the term, recognizes the
diverse and complex fee practices that exist in today's plan service
provider market and their potential conflicts, accounts for the shift
from DB to DC plans, expands the scope of fiduciary protections for
plans and their participants and beneficiaries, and permits EBSA
investigators and attorneys to focus their efforts on the adviser's
conduct rather than meeting the evidentiary requirements necessary to
prove that all elements of the current regulation's five-part test are
satisfied. As discussed in further detail in the regulatory impact
analysis above, the Department believes that amending the current
regulation by broadening the scope of service providers, regardless of
size, that would be considered fiduciaries would enhance the
Department's ability to redress service provider abuses that currently
exist in the plan service provider market, such as undisclosed fees,
misrepresentation of compensation arrangements, and biased appraisals
of the value of employer securities and other plan investments.
[[Page 65276]]
b. Affected Small Entities
The Department is unable to estimate the number of small service
providers that would be affected by the proposal. These service
providers generally consist of professional service enterprises that
provide a wide range of services to plans, such as investment
management or advisory services for plans or plan participants, and
appraisal, consulting, brokerage, pension insurance advisory services,
investment evaluations, or valuation services. Many of these service
providers have special education, training, and/or formal credentials
in fields such as ERISA and benefits administration, employee
compensation, taxation, actuarial science, or finance.
The Small Business Administration considers service providers with
annual revenues of less than $7 million to be small entities. Using
data from Schedule C of the Department's 2007 Form 5500, which
generally is used by plans with over 100 participants to report service
providers that rendered services to or had transactions with the plan
and received $5,000 or more in total direct or indirect compensation,
the Department estimates that about 130 of the 5,300 affected service
providers have total revenues reported on the Schedule C of over $7
million. Based on the foregoing, there would be 5,170 service providers
with revenues of less than $7 million; however, this estimate
overstates the total number of small entities that would be affected by
the proposal, because it does not include revenues from the nearly
626,000 small plans that are not required to file the Schedule C and
revenues from other sources.
c. Impact of the Proposal
Small entities that are determined to be fiduciaries under the
Department's proposal will be required to act solely in the interest of
their plan clients and participants and beneficiaries in connection
with covered services. The Department believes that amending the
current regulation to reflect additional circumstances where an
investment advice provider is in a position of authority, control,
responsibility, or influence with respect to a plan and its investment
decisions is a critical component of protecting the interest of plans
and the retirement income security of participants and beneficiaries.
The Department also is unable to estimate the increased business
costs small entities would incur if they were determined to be
fiduciaries under the proposal. Such costs would include the expense of
purchasing fiduciary liability insurance due to the increased liability
exposure that is associated with ERISA fiduciary status. The Department
estimates that, on average, affected service providers would incur a
cost of $1,900 to determine whether a service provider's contracts and
arrangement with plans, or activities carried out pursuant to them,
would make the service provider a fiduciary under the proposed rule.
It is possible that some small service providers may find that the
increased costs associated with ERISA fiduciary status outweigh the
benefit of continuing to service the ERISA plan market; however, the
Department does not have sufficient information to determine the extent
to which this will occur. It is possible that the economic impact of
the rule on small entities would not be as significant as it would be
for large entities, because generally, small entities do not have as
many business arrangements that give rise to conflicts of interest.
Therefore, they would not be confronted with significant costs to
restructure transactions that would be faced by large entities.
The Department invites comments regarding all aspects of this IRFA.
10. Paperwork Reduction Act
The proposed rule is not subject to the requirements of the
Paperwork Reduction Act of 1995 (PRA 95) (44 U.S.C. section 3501 et
seq.), because it does not contain a collection of information as
defined in 44 U.S.C. section 3502(3).
11. Congressional Review Act
The proposed rule is subject to the Congressional Review Act
provisions of the Small Business Regulatory Enforcement Fairness Act of
1996 (5 U.S.C. 801 et seq.) and, if finalized, will be transmitted to
Congress and the Comptroller General for review. The proposed rule is a
``major rule'' as that term is defined in 5 U.S.C. 804, because it is
likely to result in an annual effect on the economy of $100 million or
more.
12. Unfunded Mandates Reform Act
For purposes of the Unfunded Mandates Reform Act of 1995 (Pub. L.
104-4), as well as Executive Order 12875, the proposed rule does not
include any Federal mandate that may result in expenditures by State,
local, or Tribal governments in the aggregate of more than $100
million, adjusted for inflation, or increase expenditures by the
private sector of more than $100 million, adjusted for inflation.
13. Federalism Statement
Executive Order 13132 (August 4, 1999) outlines fundamental
principles of federalism, and requires the adherence to specific
criteria by Federal agencies in the process of their formulation and
implementation of policies that have substantial direct effects on the
States, the relationship between the national government and States, or
on the distribution of power and responsibilities among the various
levels of government. This proposed rule does not have federalism
implications, because it has no substantial direct effect on the
States, on the relationship between the national government and the
States, or on the distribution of power and responsibilities among the
various levels of government. Section 514 of ERISA provides, with
certain exceptions specifically enumerated, that the provisions of
Titles I and IV of ERISA supersede any and all laws of the States as
they relate to any employee benefit plan covered under ERISA. The
requirements implemented in the proposed rule have no implications for
the States or the relationship or distribution of power between the
national government and the States.
Statutory Authority
This regulation is proposed pursuant to the authority in section
505 of ERISA (Pub. L. 93-406, 88 Stat. 894; 29 U.S.C. 1135) and section
102 of Reorganization Plan No. 4 of 1978 (43 FR 47713, October 17,
1978), effective December 31, 1978 (44 FR 1065, January 3, 1979), 3 CFR
1978 Comp. 332, and under Secretary of Labor's Order No. 1-2003, 68 FR
5374 (Feb. 3, 2003).
List of Subjects in 29 CFR Part 2510
Employee benefit plans, Employee Retirement Income Security Act,
Pensions, Plan assets.
For the reasons set forth in the preamble, Chapter XXV, subchapter
F, part 2510 of Title 29 of the Code of Federal Regulations is proposed
to be amended as follows:
PART 2510--DEFINITION OF TERMS USED IN SUBCHAPTERS C, D, E, F, AND
G OF THIS CHAPTER
1. The authority citation for part 2510 is revised to read as
follows:
Authority: 29 U.S.C. 1002(2), 1002(21), 1002(37), 1002(38),
1002(40), 1031, and 1135; Secretary of Labor's Order 1-2003, 68 FR
5374; Secs. 2510.3-101 and 2510.3-102 also issued under sec. 102 of
Reorganization Plan
[[Page 65277]]
No. 4 of 1978, 43 FR 47713, 3 CFR, 1978 Comp., p. 332 and E.O.
12108, 44 FR 1065, 3 CFR, 1978 Comp., p. 275, and 29 U.S.C. 1135
note. Section 2510.3-38 also issued under Sec. 1, Pub. L. 105-72,
111 Stat. 1457.
2. In Sec. 2510.3-21, revise paragraph (c) to read as follows:
Sec. 2510.3-21 Definition of ``Fiduciary.''
* * * * *
(c) Investment advice for a fee. (1) General. Except as provided in
paragraph (c)(2) of this section, a person renders ``investment
advice'' for a fee or other compensation, direct or indirect, to an
employee benefit plan, within the meaning of section 3(21)(A)(ii) of
the Employee Retirement Income Security Act of 1974 (the Act) and this
paragraph, if:
(i) Such person--
(A)(1) Provides advice, or an appraisal or fairness opinion,
concerning the value of securities or other property,
(2) Makes recommendations as to the advisability of investing in,
purchasing, holding, or selling securities or other property, or
(3) Provides advice or makes recommendations as to the management
of securities or other property,
(B) To a plan, a plan fiduciary or a plan participant or
beneficiary;
(ii) Such person either directly or indirectly (e.g., through or
together with any affiliate)--
(A) Represents or acknowledges that it is acting as a fiduciary
within the meaning of the Act with respect to providing advice or
making recommendations described in paragraph (c)(1)(i) of this
section;
(B) Is a fiduciary with respect to the plan within the meaning of
section 3(21)(A)(i) or (iii) of the Act;
(C) Is an investment adviser within the meaning of section
202(a)(11) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-
2(a)(11)); or
(D) Provides advice or makes recommendations described in paragraph
(c)(1)(i) of this section pursuant to an agreement, arrangement or
understanding, written or otherwise, between such person and the plan,
a plan fiduciary, or a plan participant or beneficiary that such advice
may be considered in connection with making investment or management
decisions with respect to plan assets, and will be individualized to
the needs of the plan, a plan fiduciary, or a participant or
beneficiary.
(2) Limitations. (i) For purposes of this paragraph (c), a person
shall not be considered to be a person described in paragraph (c)(1) of
this section with respect to the provision of advice or recommendations
if, with respect to a person other than a person described in paragraph
(c)(1)(ii)(A), such person can demonstrate that the recipient of the
advice knows or, under the circumstances, reasonably should know, that
the person is providing the advice or making the recommendation in its
capacity as a purchaser or seller of a security or other property, or
as an agent of, or appraiser for, such a purchaser or seller, whose
interests are adverse to the interests of the plan or its participants
or beneficiaries, and that the person is not undertaking to provide
impartial investment advice.
(ii) For purposes of this paragraph (c), the following acts in
connection with an individual account plan (as defined in section 3(34)
of the Act) shall not, in and of themselves, be treated as the
rendering of investment advice for purposes of section 3(21)(A)(ii):
(A) Provision of investment education information and materials
within the meaning of 29 CFR 2509.96-1(d);
(B) Marketing or making available (e.g., through a platform or
similar mechanism), without regard to the individualized needs of the
plan, its participants, or beneficiaries, securities or other property
from which a plan fiduciary may designate investment alternatives into
which plan participants or beneficiaries may direct the investment of
assets held in, or contributed to, their individual accounts, if the
person making available such investments discloses in writing to the
plan fiduciary that the person is not undertaking to provide impartial
investment advice;
(C) In connection with the activities described in paragraph
(c)(2)(ii)(B), the provision of general financial information and data
to assist a plan fiduciary's selection or monitoring of such securities
or other property as plan investment alternatives, if the person
providing such information or data discloses in writing to the plan
fiduciary that the person is not undertaking to provide impartial
investment advice.
(iii) For purposes of paragraph (c)(1)(i) of this section, the term
``advice, or appraisal or fairness opinion'' shall not include the
preparation of a general report or statement that merely reflects the
value of an investment of a plan or a participant or beneficiary,
provided for purposes of compliance with the reporting and disclosure
requirements of the Act, the Internal Revenue Code, and the
regulations, forms and schedules issued thereunder, unless such report
involves assets for which there is not a generally recognized market
and serves as a basis on which a plan may make distributions to plan
participants and beneficiaries.
(3) Fee or other compensation. For purposes of this paragraph (c)
and section 3(21)(A)(ii) of the Act, a fee or other compensation,
direct or indirect, received by a person for rendering investment
advice means any fee or compensation for the advice received by the
person (or by an affiliate) from any source and any fee or compensation
incident to the transaction in which the investment advice has been
rendered or will be rendered. The term fee or compensation includes,
for example, brokerage, mutual fund sales, and insurance sales
commissions. It includes fees and commissions based on multiple
transactions involving different parties.
(4) Internal Revenue Code. Section 4975(e)(3)(B) of the Internal
Revenue Code of 1986 (Code) contains provisions parallel to section
3(21)(A)(ii) of the Act which define the term ``fiduciary'' for
purposes of the prohibited transaction provisions in Code section 4975.
Effective December 31, 1978, section 102 of the Reorganization Plan No.
4 of 1978, 5 U.S.C. App. 214 (2000 ed.) transferred the authority of
the Secretary of the Treasury to promulgate regulations of the type
published herein to the Secretary of Labor. All references herein to
section 3(21)(A)(ii) of the Act should be read to include reference to
the parallel provisions of section 4975(e)(3)(B) of the Code.
Furthermore, the provisions of this paragraph (c) shall apply for
purposes of the application of Code section 4975 with respect to any
plan described in Code section 4975(e)(1).
(5) A person who is a fiduciary with respect to a plan by reason of
rendering investment advice (as defined in paragraph (c)(1) of this
section) for a fee or other compensation, direct or indirect, with
respect to any moneys or other property of such plan, or having any
authority or responsibility to do so, shall not be deemed to be a
fiduciary regarding any assets of the plan with respect to which such
person does not have any discretionary authority, discretionary control
or discretionary responsibility, does not exercise any authority or
control, does not render investment advice (as defined in paragraph
(c)(1) of this section) for a fee or other compensation, and does not
have any authority or responsibility to render such investment advice,
provided that nothing in this paragraph shall be deemed to:
(i) Exempt such person from the provisions of section 405(a) of the
Act concerning liability for fiduciary breaches by other fiduciaries
with respect to any assets of the plan; or
[[Page 65278]]
(ii) Exclude such person from the definition of the term ``party in
interest'' (as set forth in section 3(14)(B) of the Act) with respect
to any assets of the plan.
* * * * *
Signed at Washington, DC, this 13th day of October 2010.
Phyllis C. Borzi,
Assistant Secretary, Employee Benefits Security Administration,
Department of Labor.
[FR Doc. 2010-26236 Filed 10-21-10; 8:45 am]
BILLING CODE 4510-29-P